The Pay As You Earn repayment plan is the federal student loan repayment plan that has the lowest required monthly payments for most borrowers. It also is the plan that has the best student loan forgiveness program.
Pay As You Earn (PAYE) requires borrowers to pay 10% of their discretionary income towards their student debt each month. Borrowers who make PAYE payments for 20 years will be eligible to have their remaining balance forgiven. The plan is also eligible for Public Service Loan Forgiveness.
The part of PAYE that will disqualify many borrowers is the current requirement that all of your loans must have originated after October 1, 2007. If your loans are older, the best you can qualify for is Income-Based Repayment (IBR has similar terms, but not quite as good as PAYE).
If your loans are too old to qualify for PAYE, be sure to check out our article on signing up for IBR. If your loans are no too old, enrollment can be fairly simple.
Make sure you know who services your federal loan – ALL OF THEM.
Go to the federal student loan database to find a list of all of your federal loans. This page will show all of the companies servicing your loans and how much you owe. You will need all of this information to determine your monthly income-driven payment to each company (Don’t worry, you won’t be doing any complicated math on this one).
Consider Federal Student Loan Consolidation first.
If you are going to consolidate your student loans, you can enroll in PAYE at the same time, so there is no point in signing up until your consolidation is processed.
We have previously discussed consolidation in more detail, and it is important to fully understand the pros and cons of consolidation before you make this decision. If you decide to consolidate, go to the federal student loan consolidation website, and you can also enroll in PAYE when you file that paperwork.
Verify that PAYE is the Ideal Repayment Plan
There are many flavors of federal income-driven repayment plans.
PAYE is one that offers very low payments, but it may not be the best choice for all borrowers. Take some time to study the various IDR options to ensure that PAYE is the best choice.
Borrowers curious about the monthly payments on each federal repayment plan can utilize the federal student loan repayment estimator.
Submit IDR Application
The Department of Education uses one single form to process all IDR applications.
Within the application, borrowers are given the option of selecting the plan that will result in the lowest monthly payment. However, it is recommended that borrowers choose their preferred plan rather than letting the loan servicer pick. PAYE and REPAYE have equal monthly payments, but PAYE may be better for some borrowers while REPAYE is a better choice for others. Letting someone else pick the right plan could lead to a mistake.
According to the Department of Education, completing the application should only take 10 minutes.
Most borrowers will find documenting income to be the most complicated part.
Submit proof of income
As part of the form submission, you will be asked to document your income.
The easiest way to prove income is to follow the steps to have the IRS send your most recent tax return to the Department of Education. However, borrowers who have lost their jobs or had a drop in income from the previous tax year will want to provide alternative documentation.
Loan servicers handle this part of the application on their own, but most will allow borrowers to upload two recent paychecks as proof of income.
Wait patiently, but keep on your lenders
Processing IBR/PAYE applications can take over three months. However, usually, it takes much less time.
The process is not without flaws, and as a result, it is critical you continue to check in to verify that your lender(s) has the proper documents and that things are going according to schedule.
Be sure to re-apply each year
The PAYE payments only last for one year.
Each year you must again document your income and re-apply for PAYE. The re-application is fairly easy, but you don’t want to wait until the last second. As this can also take months to review, plan on applying approximately three months before your PAYE plan is set to expire. You don’t want your payments to go up and not be able to afford them.
Borrowers who have monthly payments that are smaller than their loan balances will also want to avoid missing a deadline because it can trigger interest capitalization.
Handling PAYE Application Rejections
Not all borrowers are eligible to enroll in PAYE.
In most cases, borrowers will have to select another repayment plan. The Revised Pay As You Earn (REPAYE) plan was created so that people who were rejected for PAYE could still make payments at 10% of their discretionary income.
There are three main reasons an application for PAYE might get rejected.
Your income is too high
Having an income too high for PAYE can be a problem, but many high earners are pleasantly surprised to learn that they qualify.
To sign up for PAYE, a borrower must show a “partial financial hardship.” While this sounds complicated, the standard is pretty easy. If PAYE would save you money, you can sign up. If PAYE would cost more than the standard 10-year repayment plan, you cannot sign up.
To determine your monthly PAYE payment, just take 10% of your monthly discretionary income. Full details on discretionary income and this calculation are available here.
Your loan type does not qualify
Even though not all loans qualify for PAYE, some loans can be converted into PAYE eligible loans. Others, including certain federal loans, will never be eligible.
Loans that can be fixed – The bad news is that if you borrowers a Perkins loan or an FFEL graduate plus loan, your loan is not eligible for PAYE. The good news is that it can be consolidated into a federal direct loan and become eligible. The key is to make sure you don’t include any loans that will never be eligible for PAYE. If you added a loan that is never eligible, your entire consolidated loan loses its eligibility. This can get pretty complicated quickly, so it is important to talk through these scenarios with your lender when it comes time to consolidate.
Loans that are never eligible – The obvious answer here is private student loans. If you have a loan through a private lender, you cannot get PAYE for that loan. Parent PLUS loans also do not ever qualify for PAYE.
The date of your first loan makes you ineligible
October 1, 2007, is a significant day when it comes to PAYE. If you had existing federal student loans at that time, you cannot sign up for PAYE for any of your loans. Even if you pay off the old loans that don’t qualify, you still cannot sign up for PAYE. The only way to have borrowed loans before October 1, 2007, and still be eligible for PAYE is to have paid off the entire old loan before taking out any new PAYE eligible loans.
Final Thoughts on PAYE Applications
Most borrowers will find that applying for PAYE is a very simple process.
The most important step is to make sure that PAYE is the ideal repayment plan. The federal income-driven repayment plans are all very similar but contain important distinctions. Picking the best plan can result in significant savings.
